HM Treasury’s paper setting out its approach to on-shoring financial services legislation under the European Union (Withdrawal) Act, published on 27 June 2018.

Importantly, HMT intends to provide regulators with powers to grant transitional relief after Brexit. This is to ensure that, in a scenario in which an implementation (transition) period is not in place following 29 March 2019, firms and financial market infrastructures have sufficient time to comply with the necessary long-term regulatory changes. According to HMT, those firms that wish to continue carrying out business in the UK in the longer term will also be able to use this time-limited period to seek to obtain full authorisation (or recognition) from UK regulators without disruption to their business.

The Bank of England, FCA and PSR have also confirmed that they intend to consult with firms on proposed changes to the EU Binding Technical Standards and rules which fall within their regulatory remit. This will include rules that will apply to firms during any temporary permissions and recognition regimes.

The European Union (Withdrawal) Act

The purpose of the European Union (Withdrawal) Act is two-fold:

it will repeal the European Communities Act 1972 and import all directly applicable EU law into UK domestic law upon Brexit. This body of law, together with existing EU-derived legislation already on the UK statute book, is referred to as “retained EU law”; and

it empowers ministers to make secondary legislation, in the form of statutory instruments, to ensure that the retained EU law functions effectively when the UK leaves the EU.

According to its press release on 26 June 2018, the UK Department for Exiting the EU predicts that around 800 pieces of secondary legislation will be needed to achieve that second purpose.

Powers of the regulators

As part of its objective to deliver a complete and robust legal framework for financial regulation in the UK, irrespective of the outcome of the Brexit negotiations, HMT plans to delegate powers to the Bank of England, PRA, FCA and Payment Systems Regulator. These powers will enable those regulators to make the required changes to their rulebooks and any on–shored Binding Technical Standards (BTS) (these are rules which sit underneath EU regulations and directives and provide technical detail of how those requirements must be met).

Below is a summary of the approach that the BoE, the FCA, and PSR propose to take, as set out in their respective press releases published on 27 June 2018:

The BoE plans to consult, in co-ordination with the FCA when appropriate, on proposed changes to on-shored BTS and rules. The consultation is expected to happen in the autumn, following HMT’s publication in draft, or laying before Parliament, of SIs relating to most of the BoE’s regulatory remits.

The BoE expects firms to comply with EU law during the implementation period (assuming it takes effect). Under the terms of the draft Withdrawal Agreement, EU law would continue to apply in the UK during that period, from 29 March 2019 until 31 December 2020. UK firms should therefore plan on the assumption that requirements arising from new EU legislation that come into effect during this period will apply to UK firms and financial market infrastructures.

Like the BoE, the FCA will also be tasked with amending and maintaining EU BTS.The FCA proposes to make amendments to its Handbook to ensure it is consistent with changes the UK government is making to EU law and that it functions effectively when the UK leaves the EU.

The FCA plans to consult on these changes (and changes to the BTS) in the autumn, subject to HMT’s timelines for implementing SIs. The nature of the consultation may depend on the overall progress of the UK’s legislative preparations for EU withdrawal.

The FCA plans to consult, in due course, on the rules that will apply to firms in the temporary permissions regime.

Where EU entities currently access or do business in the UK through means other than an EU passport, the FCA proposes to set out separate details for those entities and activities in due course.

The PSR plans to consult in due course on its proposed changes to the BTS made under the Interchange Fee Regulation. These powers are linked to the PRS’s role as the main competent authority for the Interchange Fee Regulation in the UK.

Timing

HMT intends to lay the first financial services Brexit on-shoring SIs “soon”. Its current plan is to publish drafts of these SIs and accompanying explanatory information over the summer of 2018, ahead of laying them before Parliament, to give stakeholders an opportunity to engage and familiarise themselves with the draft provisions.

Among the first SIs laid will be the SIs delivering the temporary permissions regime, the temporary recognition regime for central counterparties and the SI sub-delegating the power to fix deficiencies in BTS and regulator rulebooks to the financial services regulators.

Further SIs fixing deficiencies in EU legislation will be laid over the autumn into early 2019. HMT plans to lay these SIs in groups, with some of the first to be laid in autumn covering significant files relating to prudential regulation and capital markets.

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